TRIS Rating Co., Ltd. views the residential property sector will continue to grow although certain developers will be facing more negative effects from the flood crisis than others. Developers with project concentrations in formerly flooded areas will face challenges to reduce inventory. The risk will even be higher for those whose leverage levels are rising.
TRIS Rating said today that the residential property sector will continue to be driven mainly by favourable economic growth prospects. Government’s schemes to stimulate the real estate sector via tax incentive and low-rate mortgages are not expected to have significant stimulus impacts on housing demand. The sales of low-rise units in non-flooded areas should be rather healthy. However, sales of projects in the formerly flooded areas will be lackluster. A major clearance of inventories in the flooded areas is not expected at least until 2013. Sales of Condominiums (CDs) have come back in vogue and should drive the industry growth for the next 12 — 18 months.
The credit rating agency said, the industry’s growth momentum could be pulled back should the flood threats return in the second half of 2012 when the rainy season arrives. Labor shortages have increasingly become a major concern for property developers, forcing several developers to opt for a precast construction model, relying less on manpower. The minimum wage hike will put pressure on developers’ profit margins in the short run. Past performance shows that most developers are capable of eventually passing on the cost rises to buyers.
At the end of 2011, total inventories of developers rated by TRIS Rating stood at Bt237 billion, up 20% from 2010. It would take 2.87 years to liquidate the inventory. A large part of the inventories comprise CD projects under construction. The risk of a continuing rise in inventory level is partly mitigated by acceptable presale records. Most CD projects are expected to secure presales of 60% - 80% by the time the buildings are complete.
TRIS Rating expects profit margins of developers with low exposures to flood-prone areas to be quite stable. Meanwhile, developers who have large inventories in the formerly flooded areas could see their margins under pressure for the next one to two years. Leverage levels of many developers are expected to rise due to inventory overhang in the formerly flooded areas, new projects in flood-free locations, and more CD projects. The rising leverage will partly be offset by higher CD transfer rates expected in the coming quarters owing to a jump in a number of CD projects launched in 2010. — End
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